Hope you have read the first part, where I elaborated on how my outlook on IPOs changed over the years. In the second part here, I share some interesting learnings alongside implications from a personal finance point.

Assessing the IPO!

Most of us like to simply outsource this work. So this job rests in the hands some of our relatives & friends who are in the financial services industry or some experts who tend to come on business channels.

Yet, all that an investor is required to do is just search for Prospectus of the company that is listed on the SEBI’s website. Now, I understand that it’s a very long document and hard to make sense of. But think about it as a gossip. We all love to do it and those of us who deny it publicly, love to do it even more.

The crux of a good gossip is getting straight to the point and churning the life out of it. 

So simply go to management’s commentary and industry analysis section. Now here, you will see very good things written about the company and industry. Because nobody will undersell their own business.

Now, there’s another part of a good gossip – validation from an expert.

To do this effectively, just download the annual reports of leading company in that particular industry which you want to validate. More often than not, you will see some mismatches in the growth forecasts. Now, with a little bit of research on Google, any investor can understand intuitively if these forecasts would be true or not.

But this is hard work, so we simply outsource it. And hence, not many do the actual work but simply pass around WhatsApp messages to make sure that some form of conclusion is reached. And just like that train incident of mine, ‘a lot of people can be wrong at the same time.’

Listing day GAINS!

My relatives often call me up saying, ‘Jinay, but we will simply sell on the listing day. Why don’t you tell us if this will give a good listing or not?’

I mean, really – am I an astrologer to tell you exactly what is going to happen at any given point in time?

My answer to them is that do you quit your job on the very first day? Just imagine, you work your backside off to get into Google and the during the very first hour, you go to your immediate boss and say, ‘it was a good run, thank you. Coffee is good and muffins are awesome. Maybe someone else needs this job.’

I’m sure you won’t do it. If you do it, then please contact me. I would really like to take your interview.

Another problem with listing day gains is that it’s a ticking time bomb. You are making money out of this activity until one day, Mr. Market tells you – Not Anymore Darling!

Eventually, those who make money on listing day eventually lose out to some other stock. They just don’t say it out loud. They simply start focusing back into their business or job with a determination to make that money back lost in an IPO.

Sell in profit and if it’s in loss, hold it. Because some day, it will be turn to profit sooner or later.

Raise your hand if you have heard someone say it or do it yourself unless you are in a public transport. I mean, so many of these companies have turned to paper that can only be used to eat some nice roadside chaat or sandwich. I love roadside sandwiches and along with it there are some bank or insurance or equity statements too. 

The problem is not that we cannot sell in loss. All of us can take a loss. 

The problem really is that we don’t even know why we have invested in that IPO in the very first place. Just because someone else was doing it, we did it. Now since that decision was outsourced and we are in loss, we will somehow not let anyone else take decision of our profits or losses. 

Because it was ‘I who made that final call and invested money.’ And now, it will be ‘I who will ensure that it’s profitable.’

It’s the emotional angle of this decision that at times retail investors simply put their money and never really sell them. Remember, it’s not about the money, it’s that big EGO that has got a tight slap. So there’s no point in having a rational argument with them. Be kind and let them ride out this particular lesson. 

Remember, don’t judge. We too make similar decisions in different situations where we are not an expert at. If you don’t believe me, then tell me how do you buy your car? Is it rational like going through mileage, fuel cost, maintenance, ride quality, so on and so forth. Or simply, just because my friend recommended it and its super cool. 

Even if we have made a massive mistake in buying that car because we can’t drive it properly, but we still expect kindness from others. And that’s what we need to do when interacting with our friends, clients, relatives, etc. on their IPO losses.

Be Kind! It’s hard but rewarding!

Personal Finance Implications

Most of our clients will always want to make a quick buck. That’s absolutely normal. Plus, during the euphoric times, it’s hard to really be rational and look away. So here are a few hacks, that I do during these times.

1. First and foremost, is the investor pulling out of existing investments or allocating fresh capital. This has to be set straight. Pulling out of an existing compounding machine for a quick return ends badly.
2. Make the investor research about the company. Not the WhatsApp forwards but some intricate detail that can be found in the Prospectus. 
3. Remember: Don’t do the research part of the work for your investor.
4. Then remind them of previous IPOs.
5. Success rates are often lower and getting allocation in those stocks is also based on luck.
6. Honestly, nobody stays the course of compounding. Very few do. Some forget that they had it, while others are dead.

I don’t need to crunch numbers here, but we intuitively understand how prices of stocks like Asian Paints, HDFC Bank, Wipro, Infosys, etc. have gone down by 30% to 50% many many times in the last 25 years. 

In fact, HDFC Bank has been in the same price range in the last 2 years. Making the investors question about its ability to still grow and outperform. As a result, money gets pulled out and goes into IPOs or small & mid-cap companies that can quickly grow our returns.

It’s a human tendency to go for a quick buck. And IPO certainly gives a dopamine hit. But that’s not really sustainable to create wealth.

Conclusion

Returns to be generated while investing during an IPO are unpredictable. Hence, it’s always best to outsource it to a fund manager of a mutual fund or a portfolio management service who goes through all the efforts for a fraction of a fee which a do-it-yourself investor tends to lose.

Please Note: I’m not recommending any stock here. Neither do I have any affection or hatred towards IPOs. I’m merely sharing my learnings from my experiences that life and Mr. Market has so gratefully taught me. If you have a different viewpoint, kindly, share it with me in the comment box below. It’s always great learn from different minds.

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